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Bad Faith PDF
Bad Faith PDF
A. Basic Definition
1. Common law
2. State legislation
3. Federal legislation
In the past, it has also been suggested that bad faith conduct by
insurance companies might fall within the scope of the Racketeer
Influenced and Corrupt Organizations Act, 18 U.S.C. 1961-1968
(RICO).
Senator Trent Lott and other members of the U.S. Congress are now
moving to enact additional laws geared towards bad faith.
1. Judah v. State Farm Fire and Casualty, 266 Cal.Rptr. 455 (Cal. App.
1990). Judah v. State Farm has been rejected by many courts,
including California courts, but this principle was supported in Lloyd v.
State Farm Mutual Automobile Ins. Co., 943 P.2d 729 (Ariz. Ct. App.
1996).
The California Supreme Court found that an insurer can be held liable
for bad faith conduct occurring during litigation between the insurer
and the insured. White v. Western Title Insurance Co., 710 P.2d 309
(Cal. 1985). Finding that the contractual relationship between the
insurer and the insured does not end with when litigation starts, the
found:
2. Pennsylvania
F. Unenforceable Provisions
(7) Attempting to settle a claim by an insured for less than the amount
to which a reasonable man would have believed he was entitled by
reference to written or printed advertising material accompanying or
made part of an application.
(8) Attempting to settle claims on the basis of an application which
was altered without notice to, or knowledge or consent of, the
insured, his or her representative, agent or broker.
Although the California Supreme Court initially held that a private right
of action existed under the Unfair Claims Practices Act for both first
and third party claims, Royal Globe v. Superior Court, 592 P.2d 329
(Cal. 1979), it subsequently reversed this decision for both third party
claims, Moradi-Shalal v. Fireman's Fund Ins. Cos., 758 P.2d 58 (Cal.
1988), and first party claims, Zephyr Park, Ltd. v. Superior Court, 262
Cal. Rptr. 106 (Ct. App. 1989). Thus, neither an insured nor a third
party beneficiary may bring an action against an insurer for violations
of the Unfair Claims Practices Act, although as noted below, the
common law action of breach of implied covenant of good faith and
fair dealing most likely applies to violations of the Act.
Wilson v. 21st Century Ins. Co., 38 Cal. Rptr. 3d 514 (Cal. Ct.
App. 2006); Egan v. Mutual of Omaha, 620 P.2d 141 (Cal.
1979) (duty to investigate a claim (Cal. Ins. Code
790.03(h)(3)))
Neal v. Farmers Ins. Exch., 582 P.2d 980 (Cal. 1978) (refusal
to settle one portion of claim to influence settlement of other
portions of the claim (Cal. Ins. Code 790.03(h)(12)))
Delgado v. Heritage Life Ins. Co., 203 Cal. Rptr. 672, 681-82
(Ct. App. 1984)(duty to communicate on claims matters (Cal.
Ins. Code 790.03(h)(2) and (13)))
Wilson v. 21st Century Ins. Co., 38 Cal. Rptr. 3d 514 (Cal. Ct.
App. 2006); Richardson v. GAB Business Servs., Inc., 207
Cal. Rptr. 519, 522 (Ct. App. 1984) (delays in claims
processing (Cal. Ins. Code 790.03(h)(2),(3),(4) and (11)))
Delos v. Farmers Ins. Group, 155 Cal. Rptr. 843, 857 (Ct. App.
1979) (misrepresentation of policy terms and conditions (Cal.
Ins. Code 790.03(h)(1)))
Kansas does not recognize a common law action for bad faith.
Spencer v. Aetna Life & Casualty, 227 Kan. 914 (1980). Kansas has
adopted a Uniform Trade Practices Act which includes a section
identifying and prohibiting unfair claim settlement practices. K.S.A.
40-2404(9). Courts have found, however, that this Act does not give
rise to a private right of action as the sole authority under the Act to
redress violations is granted to the Kansas Insurance Commissioner.
Bonnel v. Bank of America, 284 F.Supp.2d 1284, 1289 (D.Kan.
2003); Earth Scientists v. United States Fidelity & Guarantee, 619
F.Supp. 1465, 1468 (D.Kan. 1985).
In Kansas, the sole remedy for an insured with a first party claim
against an insurance company is for breach of the contract and/or to
report the insurer to the Kansas Insurance Commissioner under the
Unfair Claim Settlement Practices Act. However, Kansas law does
provide for extra-contractual damages for first party claims under
certain circumstances through K.S.A. 40-256:
The tort of bad faith in first party disability insurance cases has not
been recognized in Missouri (although a tort claim for bad faith
refusal to settle is recognized in Missouri). Rossman v. GFC Corp. of
Missouri, 596 S.W.2d 469 (Mo.App.E.D. 1980). Missouri does
provide a statutory claim for “vexatious refusal” through RSMo.
375.420:
Illinois law regarding the existence of a common law action for breach
of the implied covenant of good faith in the context of first party
actions is confused. This action was initially recognized by some
Illinois courts. In 1996, the Illinois Supreme Court finally concluded
that while a common law action for bad faith is available in third party
claims for bad faith failure to settle, Illinois does not recognize such
an action for first party claims. Cramer v. Insurance Exchange
Agency, 675 N.E.2d 897 (Ill. 1996). The Court did recognize that well
established torts (such as fraud) may arise in addition to a breach of
insurance contract action from an insurer’s conduct. The Cramer
decision was based in large part upon the existence of 215 ILCS
5/155 which provides additional remedies for breach of insurance
contract:
(a) 60% of the amount which the court or jury finds such party is
entitled to recover against the company, exclusive of all costs;
(b) $60,000;
(c) the excess of the amount which the court or jury finds such party
is entitled to recover, exclusive of costs, over the amount, if any,
which the company offered to pay in settlement of the claim prior to
the action.
(2) Where there are several policies insuring the same insured
against the same loss whether issued by the same or by different
companies, the court may fix the amount of the allowance so that the
total attorney fees on account of one loss shall not be increased by
reason of the fact that the insured brings separate suits on such
policies.
a. Statutory penalties.
b. Statutory interest.
c. Liability for judgments in excess of the policy limits.
d. Attorneys fees.
e. Emotional distress.
g. Punitive damages.
I. Appearance is everything
It is easy to avoid actually acting in bad faith in administering claims.
However, given the apparent willingness of juries to return astronomical bad
faith verdicts and a judicial willingness to allow bad faith claims to proceed to
a jury, not acting in bad faith may not be sufficient to avoid a bad faith
verdict. The mere appearance of impropriety must also be avoided.
1. statutes
B. Timing
2. Does it appear that the claims adjuster was investigating the claim to
determine if coverage existed, or investigating the claim to determine
that no coverage existed.
- failure to cooperate
At least one court has even recognized that an insurer may bring a
claim against its insured for bad faith. Liberty Mutual Insurance Co. v.
Altfillisch Constr. Co., 139 Cal Rptr. 91 (Cal. App. 1977) (doctrine of
bad faith creates an independent tort that allows the insurer to seek
affirmative relief for an insured=s breach of the duty of good faith and
fair dealing).
Duty of defense arises for claims that are even potentially within
coverage.
(7) the fault of the insured in inducing the insurer's rejection of the
compromise offer by misleading it as to the facts; and
(8) any other factor tending to establish or negate bad faith on the
part of the insurer.
Some courts will look beyond the settlement context to evaluate the
reasonableness of the insurer's failure to settle.
A. Documenting files
1. To avoid successful claims of bad faith, you must do more than just
act reasonably, you must be able to prove you acted reasonably.
3. Date stamp all materials received into file. The importance of being
able to effectively reconstruct when certain materials were received,
sometimes several years after the fact, cannot be overstated. While
the underlying breach of contract claim will be determined by looking
at all the evidence developed at the time of and after the claims
decision, a bad faith claim is decided by examining what information
was available at the time the claims decision was made. In addition,
allegations of specific conduct which might be bad faith (e.g. failure to
timely respond to demand letter) may rely upon when certain
materials were received and how quickly they were acted upon.
b. Example
8. Denying coverage.
a. Clearly state all bases upon which the claim can be denied.
b. Cite the specific language of the policy upon which you are
relying in denying coverage. Do not paraphrase.
a. Generally the state law of the state in which the policy was
issued will control. Each state's insurance act may have
provisions which apply to the policy in question. If these
provisions are found to apply to the policy they may:
(i) require certain provisions which are read into the policy
even if they are not expressly stated in the policy
c. Examples:
Intoxication exclusions:
State law generally imposes time limits for how long a person
may be barred from recovering on a pre-existing condition.
These time limits are often between 6 and 18 months.
Permanent exclusion of a pre-existing condition would run
contrary to state statute. See, e.g., Cal. Ins. Code sec.
10232.4.
1. Obtain and document all useful information from claimant and others.
2. Medical history
d. Example
1. Increasingly, attorneys will seek not only to establish that the handling
a particular claim was bad faith, but also will try to establish a pattern
or practice which goes beyond the claim at hand.
-incentive plans
-operation reports
IV. SUBROGATION/ASSIGNMENT/REIMBURSEMENT
A. Generally
The ability to recover benefits paid to the insured will vary according to
state law. Many states prohibit subrogation by health insurance policies or
health and accident insurance policies which requires examination of the
state’s insurance statutes to determine whether the policy at issue falls
within the definition of a health policy.
B. Missouri
C. Kansas
Kansas common law prohibits subrogation for accident and health policies
but not for indemnity policies. This common law position was codified by
the Kansas Insurance Commissioner in Kansas Administrative Regulation
40-1-20:
A subsequent opinion from the Kansas Attorney General found that the
Kansas Insurance Commissioner had the authority to issue this regulation.
In that opinion, the Attorney General opined that authority existed based
upon statutes regulating uniform policy provisions for “accident and
sickness insurance” which do not include a subrogation provision and
prohibit inclusion of additional provisions which would be less favorable to
the insured.
D. Illinois
Illinois law does not allow for the assignment of a personal tort. In re
Estate of Scott, 208 Ill. App. 3d 846, 849, 567 N.E.2d 605, 607 (Ill. Ct.
App. 1991). Further, courts have traditionally held that life, accident,
medical, and health insurers do not have equitable or implied rights to
subrogation. American Family Ins. Group v. Cleveland, 356 Ill. App. 3d
945, 950, 827 N.E.2d 490, 494 (Ill. Ct. App. 2005). However, when an
insurance policy contains an unambiguous contractual provision that
provides for subrogation rights, the courts will enforce such rights. Id. In
these cases, the courts regard an insurance company’s claim for
subrogation to be distinct and separate from an assignment. Scott, 208 Ill.
App. 3d at 849, 567 N.E.2d at 607. The only public policy exception to
this rule is that subrogation cannot exist in wrongful death cases.